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IP: Holding the Right Cards In Japan
From: Dave Farber <farber () central cis upenn edu>
Date: Thu, 07 Mar 1996 10:16:27 -0500
From: pkirby () mail st rim or jp (Peter Kirby) Subject: Holding the Right Cards In Japan This piece that Jim Abegglen and I wrote appeared on the Editorial page of the March 4, 1996 edition of Asian Wall Street Journal. I post it here for those in the US and elsewhere who do not see the AWSJ. Holding the Right Cards In Japan By James C. Abegglen and Peter S. Kirby Foreign companies that have set up wholly owned subsidiaries in Japan in the last 15 years and have kept control of their technology have met with spectacular success. But you wonユt hear much about them. The winners in Japan's competitive environment quietly bank their earnings; the losers whine that the Japanese government is to blame for their own failures. The top 100 foreign-owned companies in Japan have total sales of $155 billion, a sum equivalent to the entire gross domestic product of Thailand or Indonesia. Foreign manufacturers and marketers have major positions in nearly all sectors of the Japanese economy. More than 40 have over $1 billion in annual sales each. The contrast with the picture of Japan as "mercantile" or "closed" could hardly be more dramatic. IBM is the largest of the foreign-owned companies, with sales of more than $14 billion and ownership of 31 separate Japanese companies in which its average equity ownership is 92%. Indeed, the strategic high-technology sector is one where foreign-owned companies stand out. Philips, Texas Instruments, Motorola, Apple Computer, Hewlett Packard, Unisys, Samsung Electronics, Intel and Digital Equipment are all members of the not-so- exclusive billion-dollar-sales club. In almost all of these cases, foreign equity ownership of the Japanese company is in the 90% to 100% range. If Japan's ministries have been seeking to protect their high-tech sector, they have not been doing a very good job of it. For the foreign companies, hanging on to their technological edge has been key. Companies like TI used their technology as a weapon to obtain a wholly owned operation in Japan. If you sell off your technology, what do you have left as an entry lever? Not people or money. Japan has an ample supply of both. A recent study by Gemini Consulting (Japan) on foreign companies in Japan provides an interesting perspective on trade disputes. For all of Detroit's loud complaints about how the Japanese economy is closed, Ford has the second largest position in Japan, larger even than the oil majors. Ford holds equity in seven Japanese companies, with total sales of more than $28 billion in 1994. However, Ford has taken minority positions in, for example, Mazda, and on average owns only 39% in these seven Japanese affiliates. Adjusting for this limited ownership, Ford still has total sales in Japan of more than $11 billion. Similarly, General Motors has sales in Japan of more than $6 billion,after adjusting for equity position. These are certainly not the trivial amounts one might expect after all of the political posturing against Japan by Detroit's auto executives. Chrysler sold off its equity position in Mitsubishi Motors and has not rebuilt a major sales position in Japan. The true auto successes in Japan, however, are the Europeans - BMW, Daimler-Benz, Volkswagen and Volvo - whose governments have been rather quiet while these companies set up sales channels in Japan and became overwhelming leaders in Japan's fast-growing import car market. BMW's 1994 sales - all imports - were well over $2 billion and Daimler's over $1.7 billion. Detroit's automakers sought to buy their way into Japan through equity in existing producers, seemingly the easy way. This approach has largely failed. The Europeans invested instead in merchandising, distributi on and after-service, controlling their Japan operations directly. They are the winners. And their governments had nothing to do with it. Again, while semiconductors are back on the U.S.-Japan trade agenda as a contentious issue, chip sellers racked up some attractive numbers. Texas Instruments' sales in Japan totalled more than $2.1 billion, Motorola $2 billion and Intel more than $1 billion. These are companies that husbanded their technology, rather than selling it on the cheap, and used that technology to stake out a major position in the Japanese economy. These corporate successes do not support the view of a closed market, nor do they argue for an extension of the market-rigging semiconductor agreement, in which the Japanese have committed to giving foreign markers 20% of the chip market. U.S. congressional hearings on trade issues, however, feature the losers, not the winners in Japan's market. And perhaps Washington finds it politically useful to focus on the losers' complaints and ignore the successes. Unfortunately, U.S.-Japan relations are the worse for it. An in-depth understanding of the real competitive situation in Japan for foreign companies could greatly change policies and positions in trade negotiations. The case of Eastman Kodak in Japan is another current trade issue. Eastman Kodak has a total of five subsidiaries in Japan that can be identified from public sources. It holds and average of 72% of the equity of these companies: They are controlled subsidiaries. The combined sales of these Eastman Kodak subsidiaries in Japan in 1994 was $1.2 billion, and Eastman Kodak is 43rd on the list of the largest foreign companies. Whatever its complaints, Eastman Kodak has a major position in the Japanese market. It has not been closed out. The Kodak trade complaint has focused on the color film market, where Kodak's share in Japan is about the same as Fuji Film's share in the U.S. market. Kodak was not aggressive in the Japanese market, allowing Fuji to establish a dominant position in color film. For its part, Fuji has been late into Kodak's U.S. turf, and has a small share position still. It is hardly the business of either the Japanese government or the U.S. government to seek to remedy the competitive problems of a particular company in a particular product, Kodak in Japan or Fuji in the U.S. The most important lessons from this study of foreign companies in Japan are highly positive. Technology is to be employed as an entry lever, not sold off to highest bidder. Management control is critical to competitive success, not to be shared or diluted. Success may require patience, but quick wins are also entirely possible. Amway in consumer products, bypassing conventional channels, moved in 15 years from nothing to 28th place among foreign-owned companies, with $1.5 billion of highly profitable sales. Procter & Gamble waged a long fight through massive losses to its current $2 billion- plus position. At the other end of the technological spectrum, Sun Microsystems in less than a decade had gained a sales level of $800 million by 1994. Microsoft (No. 79) and Compaq (No. 95) made their first appearance in the top foreign 100 in 1994, through wholly owned operations. These companies and the other winners often source product locally and elsewhere in Asia, so their success is not all reflected in U.S. or European trade figures. In the early postwar years, foreign companies formed joint ventures in order to gain market access; the average ownership position of Exxon, Shell and Mobil in their Japanese affiliates is only 58% even now. The 20 computer and electronics companies in the top 100, however, have an average foreign ownership of 85%. And unlike the earlier generation of heavy industry companies in sectors like energy, chemical and machinery, they are fully able to control and leverage their technologies and brand names in the Japanese market. It should be noted, too, that the leading foreign-owned companies are by no means all from the United States. Thirteen countries are represented in the top 100 list, with a third of the firms Europe-based and eleven from Asia. An intriguing sign of the times is the appearance of eight South Korean companies, a suggestion that the Japanese and South Korean economies may be drawing closer together than political rhetoric would suggest. Samsung Electronics had Japanese sales of over $1 billion and Samsung Corporation over $2 billion in 1994. The bottom line of this review of foreign companies in Japan is the conclusion that Japan's is a complicated, competitive, expensive economy, and also one that is huge, profitable, strategic and accessible. It is a full two- thirds of all of the economy of East Asia, not to be bypassed by any company with ambitions to be a world-class competitor. And the best of the world's competitors are doing very well in Japan already. -------------------- Mr. Abegglen is chairman of Gemini Consulting (Japan) and author of Kaisha: The Japanese Corporation. Mr. Kirby is a principal at Gemini Consulting. Table: Locked Out of Japan? The top 10 foreign companies in Japan, by equity-adjusted sales: Company Nationality Equity-adjusted sales 1. IBM USA US$13.2 billion 2. Ford USA 11.16 3. Exxon USA 9.95 4. Mobil USA 8.67 5. Shell UK/Netherlands 8.42 6. Caltex USA 6.87 7. General Motors USA 4.2 8. Xerox USA 4.2 9. Alcan Canada 3.03 10. Nestle Switzerland 2.52 -Peter ---- Peter Kirby pkirby () st rim or jp Shibuya-ku, Tokyo Japan
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